The Challenge of Designing Capital Equalization Transfers: An Application to Spanish Regions

Abstract

This article analyzes the main design issues of capital transfers with an equalization objective within a system of sub‐national finance. Although there is a vast literature and ample policy practice with the design of recurrent equalization grants, there is a dearth in the fiscal federalism literature at both the theoretical design and actual practice levels on how to use capital transfers with an interregional equalization objective. The main aims of this article are first, at the conceptual level, to identify the singular characteristics of capital expenditures and capital financing sources that would allow quantifying capital expenditure needs and financing capacity across sub‐national jurisdictions; and second, to use those measures to a capital equalization transfer formula applied at the Spanish regional level.